pursued by the Commission in making its estimate of 85 cents, then, in our judgment, that method is without justification. For, having adopted an estimated average rate of revenue, namely, $1.495, from each ton of coal carried over the 149 miles from the Lehigh and Mahanoy regions to Perth Amboy, the Commission assumed that the expenses of the transportation of coal over this particular branch of the defendant's railroad system was necessarily only the average cost of the carriage of all coal upon the defendant's entire system. The assumption which thus underlies the Commission's estimate is unwarrantable. Merely because the cost of carriage of all coal upon the defendant's entire railroad system from all points of shipment to all destinations was 56 per cent. of the gross receipts from all coal is no reason for concluding that upon a particular line or part of the system the cost of carriage bears the same ratio to the coal receipts from that particular line or part."

§ 511. Cost of service estimated from special expenditures in moving goods.

To a certain extent the entire expense of transporting may be judged from the sums expended in moving the goods. When the average amounts expended in moving quantities of a given commodity is known, a standard is established by which it may be seen whether there is not a full return to the railroad of the entire cost attributable to the transportation of these goods. This method of demonstration was used with good effect in one report by the Interstate Commerce Commission upon the contention of the trunk lines that it would be necessary for them to raise the rate on grain, which was 17 1-2 cents from Chicago to New York, as that rate was unremunerative. The quotation which follows will show how the Commission came to its conclusion that the rate yielded a fair return to the carrier:

"As bearing upon this, certain testimony given in the present investigation by the traffic manager of the Lake Shore &

Michigan Southern Railway as to the cost of moving grain over his line is interesting and instructive. He testified that the standard train upon the Lake Shore road consists of 50 cars, containing 80,000 pounds per car; that the time occupied in hauling this train from Chicago to Buffalo would be 36 hours, and that the cost of movement, including labor of trainmen, coal consumed, oil and waste, rent of engine and of cars, would approximate $260. He gave the items making up this total, which need not be repeated here. The traffic manager of the New York Central Company was unable to give the corresponding figures from Buffalo to New York, but it appeared that a standard locomotive would haul, with the assistance of a helper at one or two points, this train, or an even heavier train, from Buffalo to New York in approximately the same time and at approximately the same expense, the distance being about 100 miles less. The total train expense, therefore, of moving this traffic from Chicago to New York would be $520, while the total revenue derived from it, at 17 1-2 cents per 100 pounds, would be $7,000.

"This estimate of cost does not of course include the entire expense of moving that train-load of grain between those points. The terminal charges are entirely ignored, and these are often heavy. Nothing is allowed for maintenance of way, nor for those other expenses of operation which are chargeable in a measure upon all traffic, but which cannot in the nature of things be exactly apportioned. Again, a part of these cars must be returned empty; still the items which are taken into account, namely; labor of trainmen, cost of fuel, oil and waste, renewals and repairs of engines and cars, make up nearly one-half the operating expenses of the railroad systems under consideration, and it is impossible not to feel, after every allowance has been made, that this traffic, moving under the circumstances and con

ditions and in the quantities that it does, yields to these carriers a very handsome profit." 5

§ 512. Rule of proportionality in sharing costs.

As an abstract matter the fairest way to determine the cost of any particular service would be to apportion rateably the total disbursements of every sort to the various items of traffic and so to arrive at proportionate rates. Theoretically, perhaps, any other method is less just to all concerned. In determining what is a reasonable rate for services rendered, it is hardly proper to take the road as existing and as maintained, with its track and terminal equipments, salaries and all other expenses, and to regard as the total cost of any particular service merely the increased expense necessary to add to its business the service in question; truly the cost of that service ought to include its fair share of the interest on investments and of the general expenses.

§ 513. Law of decreasing costs.

It has been pointed out, however, in all discussions of the railroad problem by economists that the fixed expenses, which constitute so considerable a proportion of the disbursements by a railroad, are to a very large extent independent of the amount of its traffic carried. Therefore additional business will always be done at a decreasing relative cost. The net income rises as the business expands, and the law of increasing returns is again demonstrated. This may be shown in a simple formula if it be assumed only one-half of the expenditures of a railroad varies with the traffic. "If it costs a to deal with 1,000,000 units of traffic, 5,000,000 units will cost not 5x, but 1-2x +

5 Prouty Commissioner in Re Advances in Freight Rates, 9 I. C. C. Rep. 382, 397 (1903).

6 Dalton v. Boston & A. R. Co., 1885, Mass. Ry. Com. p. 130.

7 Noyes: American Railroad Rates, p. 19.

(1-2x × 5) = 3x."8 How far it is possible to justify by this economic law the making of differences in freight rates is discussed in several places later in this volume.

This rule seems to have been applied in a case before the English Commission. This was an application to determine the amount of the remuneration to be paid per annum by the Postmaster-General to the Waterford Railway Company for the conveyance of mails on their railway: (1) By certain special or notice trains required to be run on notice from the PostmasterGeneral. (2) By certain ordinary or agreed trains timed by agreement with the Postmaster-General. It was held, that the remuneration for carrying the, mails ought not to include any sum directly representing the capital cost of providing the railway; and, further, that the definite sum to be paid should be of sufficient amount-(1) To give the railway companies payment for the mails at their ordinary parcels rate, less a rebate of onethird of it, in consideration of the usual terminal services in connection with parcels being done in the case of the mail parcels by the Postmaster-General; (2) To make up to them, when required, the gross receipts of the notice trains to 5s. per train mile; (3) To compensate them for possible decrease of the receipts of agreed trains due to their times of running being partly fixed to meet postal requirements, the allowance under this head to be a "substantial" one.

§ 514. Cost of service a principle applicable to passenger

fares.

Cost of service is plainly a principle in rate making to be applied to passenger fares as well as to freight rates. It cannot be more scientifically done in one case than in the other, but it is always a matter to be inquired into. Various considerations

8 Acworth: Elements of Railway Economics, p. 50.

9 The Waterford, Limerick and Western Ry. Co. v. Postmaster-General, 11 R. & C. T. Cas. 77.

affecting the cost of passenger service are suggested in the extract from an opinion by the Interstate Commerce Commission 10 which follows, which held not invalid a fare at 3.826 cents per mile between Savannah and Charleston: "This railway between Savannah and Charleston runs mostly through swamp lands and crosses a number of rivers. From Savannah it runs parallel with the Savannah River, crossing it to the South Carolina side; the other streams crossed are the Coosawhatchie, the Salkehatchie, the Ashepo and the Edisto. Five or more drawbridges are operated. The road had eight miles of trestling, but, by filling in, the trestle mileage has been reduced to four. On account of the swamps and rivers, the construction of the road involved more than ordinary cost, and unusual expense is required to maintain it in a good state of repair. The section traversed by the line is unhealthy, much of it is uninhabitable, and the population is made up almost entirely of colored persons. They have little patches of land, and some are employed in rice cultivation. Up to about three years ago phosphate mines in that region were worked extensively, but that industry. has been abandoned to a considerable extent, because, it is suggested, of the discovery of phosphate rock in Tennessee, Florida, and other localities. There is one fertilizer factory located on the line, about 35 or 40 miles south of Charleston. There are no places of importance between the termini of this road, and the counties in South Carolina penetrated by the line (not including Charleston County) number 28 persons to the square mile as against 34 1-2 to the square mile throughout the whole State. After leaving Chatham County, which includes Savannah, the road passes through Effingham County, Ga., which has about 13 persons to the square mile."

10 Savannah B. of F. & T. v. Charleston & So. R. R., 7 I. C. C. Rep. 601 (1898).